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Engineered Support Systems's top execs say their goal is to be a Lockheed of the military-support business

After 21 years running Engineered Support Systems (EASI ), Michael F. Shanahan was happy to hand the reins over to Gerald E. Daniels. Shanahan founded the St. Louis maker of military-support equipment in 1982 and built it from a $40 million business back then to one expected to pull $800 million this year by supplying generators, air conditioners, surveillance, and logistics services to U.S. armed forces.

In April, 2003, Shanahan, then 63, decided Engineered needed a younger leader with experience running large companies. So he recruited Daniels, 58, a veteran of Boeing's (BA ) $12 billion Military Aircraft & Missile Systems unit. With Shanahan at his side, Daniels has led Engineered to the No. 33 spot on BusinessWeek's latest annual Hot Growth list.

Now, purely a visionary chairman of the board, Shanahan admits that Daniels is the executive in demand at Engineered. "I feel like the guy who lives next door to the guy that wins the lottery," says Shanahan. "Everyone bothers him now, not me."

The two execs talked to BusinessWeek Chicago Deputy Bureau Chief Roger O. Crockett about Engineered's strategy and goals in an increasingly active and shifting military landscape. Following are edited highlights of their conversations:

On leadership and strategy:


You're catching us at a time that's a rather large transition time. We started as small, entrepreneurial company and went on to make nine acquisitions. Now, it has become a rather large company. The board and I recognized that we needed an experienced CEO who could manage a multibillion-dollar company. Gerry is the right guy at the right time.

Daniels: This company got here because Mike has great business instincts and people instincts. Those two combined into an acquisition strategy. We make acquisitions based on a strategic fit and cultural fit. The cultural part is more important to us because we need to know that we can work with the acquired company, and they can work with us as a team. That's more important than cost.

Mike bought a company as big as he was [SEI in 1999] and left management of that company to the people who ran it. That was a major inflection point in the maturity of this company. He doubled the size of this company in one night. And the thing that made it take off from there was the unselfish nature of turning over our key management processes to the company that we just acquired.

I don't see any reason why that should change. When [the acquired managers] see that we have that kind of trust in them, they're like kids: When you expect them to do good things, they do good things.

On the need for Engineered's products:


Many of the things that we do some might call mundane, but they're vital. We're vital to the military because they need us to operate. I like to say: They don't leave home without us. Many of these products are too complex to be made by small companies. We've been able to accumulate such a wide array of talent that we're developing a reputation of being able to deliver.

The role of the military has changed in the last two to three years. So we're doing highly automated stuff. It's now hand-to-hand combat. If you're going to deploy troops, they have to have heat and water.

Daniels: They need our stuff to be light and mobile. Of the things that we make, 80% to 90% of it has a commercial equivalent. But that would never stand up to the rigors of the military environment. As everybody watched the Army roar across the desert in Iraq, they were watching a huge trail of moving water supplies and ammunition. That's the business that we want to be in. Our heater operate in minus 29-degree temperatures, and a certain number of feet above sea level. They call them ruggidized conditions.

We're now getting into things like radars. No one expects us to be dominant player in radars, except in portable security radars for ground surveillance.

On acquisitions:


The turning point was 1997. We made a $26 million, $37 million, and $40 million acquisitions. Then we bought SEI for $175 million in 1999. Why? For a $30 million company to grow organically on that scale would have been unheard of. There is good organic growth here, but it can't keep pace with those kinds of acquisitions.

How did we initiate an acquisition the size of SEI? I saw in the newspaper that SEI was up for sale. So I called my friend over there and said, "Why did you exclude us?" They said, "you couldn't handle it." So we raised $25 million that strengthened our balance sheet and enabled us to acquire the company. For a while we had a pretty good slug of debt there [$84 million] that we paid off in three to four years.

On Engineered's mission:


In the early days we were opportunistic if we were anything. We thought let's just go for it. I don't know that we had a mission statement until someone said we ought to have one. The worst thing a company could do is have a mission statement that would prevent it from acting on opportunity. If I see enough enthusiasm in a room, then I find a way to capitalize on it.

On today's business:


Today, one-third of our business is services and two-thirds is hardware. Today, services are not as profitable. But it requires very low investment and generates high return. Services is a great cash-flow business. It also works extremely well with the hardware and systems businesses we're in.

We make a 900-kilowatt generator about the size of U-Haul trailer. That came out of our services business. We now build that in another division, so they benefited from what services did. That's a case where the services world led to a contract that's benefiting our systems business.

On company goals:


None of us has a particular size as a goal, and we don't have anything on paper. We just want to continue serving our customers. There's no reason this company can't be a $3 billion to $4 billion company. In my heart I would hope that someday when our name comes up, we would be in this military-support world what Lockheed has been to high-tech defense.

We're getting there. We're the biggest at what we do. The key is to have good solid business processes in place without becoming bureaucratic. I'm not expecting to produce a great big book of bureaucratic do's and don'ts. It suits our purposes to be extremely agile and flexible. That's key because we still have entrepreneurial fire in our belly, and we don't want to extinguish that.

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